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A countercyclical truckload (TL) mergers and acquisitions market appears to have developed, at least in comparison to broader M&A or even normal TL deal flow. During a virtual fireside chat at the FreightWaves Carrier Summit on Thursday, FreightWaves Chief Strategy Officer JT Engstrom and Spencer Tenney, president and CEO, Tenney Group, discussed the current interest in trucking deals.
Tenney Group is an advisory firm focused on M&A in the transportation industry.
Tenney said broader M&A activity has been “pencils down” as deal flow has essentially ceased during the pandemic, causing some investment banking shops to trim staff by 25% to 50%. He said his firm has had a different experience through COVID, helping some companies find an exit and providing good companies with opportunities to get stronger.
On newly formed trends since the pandemic began, Tenney said COVID has forced action in some instances that should have happened awhile back. He said some carriers are using acquisitions to gain scale to offset rising expenses by consolidating terminals, adding density and eliminating redundant midlevel management functions. Combining the right two organizations can reduce costs as a percentage of revenue significantly.
Further, Tenney said several companies have also approached his firm in efforts to de-risk their business and diversify their model. Many entered the pandemic overexposed to a particular vertical or mode of transportation and have sought diversification through acquisition. Another recently developed trend: companies using acquisitions to acquire talent.
Tenney said negotiations around future earnouts have eased as usually both the buyer and the seller have experienced declines in revenue and earnings due to COVID. Earnout periods have shortened significantly from two or three years to one, as long as the seller can show that the decline was truly a COVID-related dip.
Deal flow over $100 million remains tough when financing is required or the transaction includes a large amount of goodwill. Tenney said lenders aren’t providing financing on cash flow currently. However, deals in the $20 million to $100 million range are flowing as asset-based lenders have gotten more aggressive. Those deals have been easier to piece together using a combination of seller earnouts, buyer’s lines of credit, equity and asset-based lending, Tenney commented.
On valuations, Tenney said COVID has allowed the strongest companies that have performed in the downturn to get high purchase multiples. The thought is “in 2018 every company looked good,” according to Tenney, but if a company can show it is able to withstand this market it is being rewarded.